If It's Called The Number One Rule, Location Might Be Important!
I've got about two sentences to grab your attention, because this is the most over used phrase in real estate! Location, Location, Location....sounds familiar doesn't it? As the last three to four years has developed a feeding frenzy in real estate, people often forget some of the most important considerations when buying high return real estate. Certainly for a while it seems that the number one rule seemed to take a back seat to the #2 rule, Cash Flow Is King!
There is no question that buying a property for high returns that provides a 10-12% or higher return on your investment is wise, especially when you can't count on continual appreciation. While the cash flow that an investment property provides is crucial in analyzing a great deal, let us not forget that long after the market rebounds, there will always be really cheap properties in bad areas, as well as homes that are in need of major rehab! This means that the Cash Flow Is King Rule, must always work in hand with Location, Location, Location.
The first reason for this is that the properties that are in superior locations will appreciate much faster, while still providing very desirable cash flows. The ROI in the short term may be a few percentage points lower, but in the long term the value will increase to the point that an investor might make a much larger capital gain. This end profit is important to consider, especially if you are using a 1031 exchange to roll into larger portfolios.
Secondly, if the property is projecting a very high Return on Investment because it is in a very cheap area, you might want to find out the reasoning behind why it is such a cheap area? If a house is selling for $8,500 and doesn't appear to need major rehab it may be related to being in a very high crime area, which means that it will be very hard to attract quality tenants, and the tenants you do attract may be harder on the property, leading to much higher maintenance costs than projected. If the neighborhood is too rough, Section 8 may not even allow their applicants to live in the home, thus depleting your tenant base further. If the tenants ever move out, it's a race to see who can steal your copper plumbing, condensing unit, or even your electrical wiring! SO YOU NEVER WANT TO BUY IN VERY HIGH CRIME AREAS EVEN IF THE PROPERTY IS REALLY CHEAP! In bigger city urban cores this can be block by block, and so you really have to have an expert or avoid the urban core all together.
Another thing about cheap properties, is that if the maintenance is so great that it's going to take a 6 month renovation, you are likely better moving on, even if you can do the work yourself. Some properties require so much renovation that experienced investors stay away and are glad to leave such heavy lifting to a novice who doesn't realize what they are getting into. Often these huge projects leave much room or error and your profits quickly get eaten up in latent defects!
The language below was in the listing on this one and gives you some ideas, if the picture didn't already say 1,000 words!
|SOLD AS IS NEAR COLLEGES, EXPRESSWAYS, DOWNTOWN. NO SELLER'S DISCLOSURE, NO TERMITE OR WARRANTIES; FINAL APPROVAL OF OFFER AND CLOSING CONTINGENT UPON COURTS APPROVAL|
If you really want a great investment with very little risk, why not partner with Former Rich Dad Poor Dad Coach Jared Garfield and the Rich Life Real Estate Team? Having done over 1,800 properties as a team gives us plenty of experience in selecting the right properties, doing the rehab correctly and managing the property with excellent tenants.